SignificanceofCommercialBanks
Creditfor
expanding
businesses
Financial
servicesfor
households
Externalities
fromfinancial
stability
Commercial
banksandUK
trade
Important
sourceof
employment
Instrumentof
monetary
policy
Commercialbankingisanoligopoly
Atthemomentonly3%ofpersonaland4%of
UKbusinesscustomersswitchtoadifferent
bankinanyyear(Source:CMA,August2016)
Accountmarketshare
0.0%
5.0%
10.0% 15.0% 20.0% 25.0% 30.0%
27%
LloydsBankPlc(hq:London)
BarclaysBankPlc(hq:London)
18%
TheRoyalBankofScotland(hq:Edinburgh)
18%
12%
HSBCBankPlc(hq:London)
10%
SantanderUKPlc(hq:London)
6%
NationwideBuildingSociety(hq:Swindon)
4.2%
TSBBankPlc(hq:Edinburgh)
Co-operativebank(hq:Manchester)
2%
Challengerbanksarerelativelysmall
AnumberofnewbanksareattemptingtoestablishthemselvesintheUKfinancial
systemandchallengethedominanceoftheleadingUKcommercialbanks
TSB(Sabadell)
VirginMoney
Aldermore
MetroBank
Shawbrook
Handelsbanken
Barrierstoentryintobankingsector
• Inoligopolisticmarkets,barrierstoentrymakeitharder
fornewentrantstoscaletheirbusinessandmakeprofits
• Entrybarriersmightinclude:
1. CostofITsystemsandexpenseofestablishingbranches
2. Accesstopaymentsystems(e.g.cheque/cardclearing)
3. Establishedbankshaveaccesstocheaperretailsavings
depositsfromtheirexistingcustomers
4. Bankswhichareviewedbyinvestorsas‘toobigtofail’
areseenaslowerriskandthereforebenefitfromlower
wholesalefundingcosts– thisisaneconomyofscale
5. Customerresistancetochangingaccounts– including
thetimeandinconvenience– thismakesitharderto
buildcustomernumbers
HowBanksCreateMoney
Bankstakedeposits
ofmoneyfrom
saversandlendit
toborrowers
Banksthenlend
moneytobusinesses,
thusallocatingfunds
betweenalternative
investmentprojects
TheModernReality
• Bankscreatecreditbyextending
loanstobusinessesand
households– pureandsimple!
• Theydonotneedtoattract
depositsfromsaverstodothis
• Whenabankmakesaloan,for
exampletosomeonetakingout
amortgagetobuyahouse,ora
businesstakingoutaloanto
financetheirexpansionit
creditstheirbankaccount with
abankdepositofthesizeofthe
loan/mortgage.
• Atthatmoment,newmoneyis
created.
“Banksmakingloansandconsumers
repayingthemarethemostsignificant
waysinwhichbankdepositsarecreated
anddestroyedinthemoderneconomy.”
(Source:BankofEngland)
AssetsandLiabilitiesofaBank
Assets
Liabilities
Cash
Customer deposits
BalancesatBankofEngland
Moneyowed tobondholders
Loans(Advances)
Moneyowedtootherbanks
Securities(e.g.Bonds)
Fixedassets(e.g.Buildings)
CashintheBank!
BalanceSheetAfterNewLending
Commercialbanksbeforelending
Assets
Liabilities
Currency
Deposits
Reserves
BalanceSheetAfterNewLending
Commercialbanksafterlending
Commercialbanksbeforelending
Assets
Liabilities
Currency
Assets
NewLoans
New
Deposits
Currency
Deposits
Reserves
Liabilities
Deposits
Reserves